Political and geopolitical developments that heighten external vulnerabilities and policy weaknesses in the South Caucasus are exerting a significant influence on the sovereign credit profiles of the region’s countries, particularly Georgia (BB/Negative) and Armenia (BB-/Stable), according to Fitch Ratings.

Of the three countries in the region, only Azerbaijan holds an investment-grade rating (BBB-/Stable).

Fitch highlights that Azerbaijan’s strong external economic position continues to support its credit rating. The agency expects the country’s fiscal policy to remain focused on preserving sovereign external assets, which should help prevent macroeconomic imbalances and provide sufficient financial buffers to manage oil price volatility.

However, Azerbaijan’s monetary policy remains relatively weak compared to its peers. Key constraints identified by Fitch include an underdeveloped capital market, excess liquidity, a low level of financial intermediation, and a still-high level of dollarisation in the financial system.

Fitch cited the sharp rise in political risks in Georgia, coupled with a decline in international reserves, as key factors behind its decision to revise the country’s rating outlook from stable to negative in December 2024. The recovery of reserves will depend on current account inflows, particularly foreign direct investment, as well as economic policy measures.

In Armenia, the costs of integration of around 65,000 refugees who left Karabakh and increased military spending will lead to fiscal expansion and a rise in public debt. Currency depreciation presents further risks to the debt burden, given the significant share of liabilities denominated in foreign currency.

Despite these pressures, the banking sectors in all three countries remain resilient and profitable. "In Azerbaijan, since 2019, banking sector indicators have benefited from reduced dollarisation and improved asset quality. In Georgia, political tensions have not significantly impacted consumer confidence or banking profitability, with the sector benefiting from stable economic activity, relatively high interest rates, and improved asset quality. In Armenia, Fitch expects the banking sector to maintain the record growth rates seen over the past three years," the report stated.